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Scared of Taxes

Posted: Wed Jun 11, 2008 10:27 am
by jack_indigo
As a PHP dev working from home in the USA for my first year doing this, I'm scared to death of what my tax bill is going to be like. I'm an LLC, but I'm supposed to be doing what's called estimated income tax. This is the biggest racket if there ever was. The Federal Government expects you to guess what your next quarter's earnings are going to be, and pay a tax on that. However, the only reasonable way to handle this is to forget that this says "estimated" and just look over last quarter's earnings, take out 39% to 41%, and pay that into the system at the federal, state, and county levels (and in some cases city level as well). Some like to take last quarter's earnings averaged by the previous quarter's earnings and the earnings of the same quarter the year before, and then round up from there. And if you didn't catch that, I said "quarter" - meaning you have to do this four times a year or you could pay a penalty. As well, if you keep paying penalties, eventually the IRS will ask to audit your records and receipts, and the state revenue departments may follow suit. I also hear that about every 8th to 10th year of business, you can expect the IRS to want to audit at least some part of your business transactions.

Welcome to Amerika. Land of the free runner (escaping the tax man), home of the grave.

So, here it is June, and I've calculated I owe about $6K in taxes. I had the idea that I would pay as I got through a quarter, but I've been barely able to stay ahead of the non-USA competition. And when you miss a quarter, there's steep penalties, and if you fail to guess an estimate that is high enough, you end up paying penalties on that too.

So some may say, okay, get some other projects online with affiliate marketing as well as your own site ideas that generate subscription cash and so on. Fine, but then in some ways I could end up needing to pay quarterly sales tax as well.

And it's anyone's guess as to what will happen when the IRS realizes my clients are from the UK, Canada, and other parts of Europe.

And if I get stuck in a bind and need to sublet to foreign aid, then I may end up having to pay oddball taxes on that too, perhaps.

There's also danger in deductions. If you do too many of them, like claim that 50% of your trips or 30% of your meals were business-related, you might trigger an audit. If you deduct tangible equipment, there's not only the headache of deamortization/amortization but you may also have to purchase this equipment back from the business and file this on your books if you ever fold the business and want to get your equipment back, listed as yours. Some people have even had trouble selling their homes because they listed their home office space as a tax deduction, the business folded, and they didn't purchase back the home office space!

Wish me luck.

Re: Scared of Taxes

Posted: Wed Jun 11, 2008 11:00 am
by onion2k
Get an accountant. A good one will save you a lot more than they charge.

Re: Scared of Taxes

Posted: Wed Jun 11, 2008 4:40 pm
by jack_indigo
Okay, so I called the US IRS on their hotline for businesses: 1-800-829-4933. Turns out I was filed accidentally as an LLP instead of an LLC because I got confused on the LegalZoom online form and gave my wife 50% interest in the company rather than keeping it solely in my name. I thought, I checked off LLC, surely that meant I could have members with interest and it wouldn't file me as anything but an LLC. But sure enough, it does, according to the IRS. So now I have to fill out this blessed 8832 form or I'll face extra taxes come the end of the year.

Next, the IRS specialist I called on the hotline told me that if I'm a consultant making websites for customers in Europe and Canada, and they Paypal me the money, or send me the money in any shape or form, then:

- there is no limit per client, per month, per year on cash I can receive from these clients

- even if those clients are abroad, there is no extra tax I have to pay except ordinary quarterly estimated income tax, and to do the self-employment part on my paperwork at the end of the year for the LLC and my personal taxes -- so no oddball foreign tax paperwork is necessary

They did warn me (although they didn't need to do that) that even though I'm paid via PayPal, they can still audit my bank deposits and see my foreign PayPal payments coming in, so they advised not to hide that and to always state those on my return. (I didn't need to be told that, but I guess this must be a common question they get?)

As for the estimated income tax, I'm going to head downtown to an el cheapo tax guy to see if I can get the best rate for getting me set up on quarterly estimated income tax.

And some say -- woo hoo, I'm in Nevada or Delaware -- I don't have to pay income tax. Wrong! In those two states, you don't pay state income taxes, which are actually minimal compared to federal income taxes. Instead, you have to pay federal income tax, and no business escapes that except with deductions, loopholes (that will bite you eventually and keep your personal army of tax attornies quite busy), and if they are a non-profit.

I wish everything were paid with either a simple flat tax or a sales tax, and I actually like the sales tax because it catches all the illegal immigrants who use our welfare, schools, and infrastructure, but only pay sales taxes. In my state, they introduced a 1% sales tax increase and cut our property taxes in half, and we didn't feel the pinch of it at all at the stores and our property taxes were cut in half just like they said. I hear the plan is working great, so I'd like to see it go even further to eliminate the property tax and perhaps even eliminate the business and individual income taxes too.

Re: Scared of Taxes

Posted: Wed Jun 11, 2008 7:18 pm
by Kieran Huggins
I could have sworn the title of this post was "Scared of Texas"... I agree with both, at any rate.

anyway: onion++, accountants FTW

Re: Scared of Taxes

Posted: Mon Jun 23, 2008 9:35 pm
by jack_indigo
Latest: A lawyer friend of my wife told her that she made a lot of income last year, but merely had to pay $800 in estimated income taxes on her LLC. So, I might not owe $6K in taxes after all. We're going to go visit the same CPA very soon. I'll let you know how it goes.

Re: Scared of Taxes

Posted: Tue Jun 24, 2008 8:35 am
by Kieran Huggins
A good accountant is worth their weight in gold.

I went and saw a new one yesterday and they gave me some excellent advice about how to save money by incorporating.

Like a good programmer, the thing that makes the difference is experience. Accountants FTW!

Re: Scared of Taxes

Posted: Thu Jul 03, 2008 6:34 pm
by jack_indigo
Wow. Just got back from the CPA (Certified Public Accountant -- the term for "bookkeeper" in the USA). I found that after $40K USD in freelance revenue this year so far, I owe $0 in taxes. I normally would have only owed about $6K, but when you add up all the exotic (yet legal) deductions I can take, I owe $0 thus far in taxes. Now, going forward, the CPA said I should store at least 20% of my earnings in a savings account just in case, but that as a freelancer I have a heck of a lot of deductions I can take, especially in my first year as I establish my business.

Other things you can do to pay less in the USA:

* Make a blog about your vacations and stick a Google AdSense ad on them, upload pictures of your vacation to prove you were there, and now all your vacations are business trips to help people make travel decisions online -- and you just picked up a tax deduction.

* All the cellphones in your home could perhaps be counted as a deduction. I had to upgrade my base plan in order to get unlimited texting and coverage for my phone, so this meant that the entire plan was therefore covered as a business deduction.

* Every time you eat out, keep your receipt, and at least half of those meals could be considered a business deduction.

* If your spouse is covering you on his/her healthcare plan, then that's a business deduction.

* Car insurance, repairs, and fuel -- again, if you follow the rules, it's a business deduction in some cases.

* If your son skateboards and you blog about it and get ad revenue from that, then your son's skateboard stuff could be considered a business deduction because you are, in effect, "sponsoring him". (That'll make any little kid's day when they find out that they've been "sponsored".)

* I could go on and on, but you really should see your CPA.

* Try to get away from software sales. The moment you have to sell software, you just triggered a required quarterly sales tax. Instead, sell services only. For instance, let's say you sell customized WordPress sites to people, and it includes quite a lot of custom code inside that you have written. Instead of selling them, sell the service of the package + installation as a consulting task. Specify that in the fine print. When they go to purchase through your online form, have a checkbox that reads, "I wish to opt out and not have you install this package for me," and have it unchecked. So, if they just make a purchase, you can tell the IRS that you were paid for customizing some software but that they opted out of services to install it.


When I add this all up, I'm doing waaaaay better than when I had my boring cubicle job the past few years. I pay less taxes, and I earn about double what I would have earned in a cubicle job. And that's just me getting started in my first year, and includes the fact I had some poor-performing months. I also managed to get 2 vacations (a month off in total) just as long as I worked about 4-5 hours a day for my clients using my laptop. If I throw in website projects of my own next year, and more PPC and SEO income, I might stand to make triple what one makes in a boring cubicle job.

As for my CPA fees, I owe just $100.

Therefore, please oh man go see your CPA if you're a new freelancer in the USA. It's worth every cent.

Re: Scared of Taxes

Posted: Thu Jul 03, 2008 6:50 pm
by Eran
I'd be a little cautious if I were you. I'm not intimately familiar with US tax laws, but some of the stuff you mentioned sound borderline illegal. Again, maybe things are much better in the US... but it sounds a little too good to be true

Re: Scared of Taxes

Posted: Thu Jul 03, 2008 7:29 pm
by jack_indigo
pytrin wrote:I'd be a little cautious if I were you. I'm not intimately familiar with US tax laws, but some of the stuff you mentioned sound borderline illegal. Again, maybe things are much better in the US... but it sounds a little too good to be true
Sure, it's good to be cautious, but here's the thing. This CPA does the books for two law firms in town, and they get about the same deal as I do. I know for certain that one really profitable law firm only had to pay $3200 USD in taxes last year. So, if this CPA has such a successful track record with those law firms, then I'm certain the information I received will also be just as accurate.

Re: Scared of Taxes

Posted: Fri Jul 04, 2008 12:17 am
by Benjamin
pytrin wrote:I'd be a little cautious if I were you. I'm not intimately familiar with US tax laws, but some of the stuff you mentioned sound borderline illegal. Again, maybe things are much better in the US... but it sounds a little too good to be true
It's not. There is a reason smart businessmen save their receipts here.

Re: Scared of Taxes

Posted: Fri Jul 04, 2008 10:59 pm
by dreamscape
jack_indigo wrote:Turns out I was filed accidentally as an LLP instead of an LLC because I got confused on the LegalZoom online form and gave my wife 50% interest in the company rather than keeping it solely in my name. I thought, I checked off LLC, surely that meant I could have members with interest and it wouldn't file me as anything but an LLC.
This is nothing you did, really. The IRS and most states treat LLCs with 2 members as partnerships for tax purposes (or sole-proprietorships for single member LLCs). That's the default typically. You can elect to be treated as a corporation for tax purposes, but that's not the default. You have to file some form explicitly stating you want to be taxed like a corporation.

But why would you want to? If you elect to be taxed as a corp, then you loose the flow through tax benefits of a partnership and will face the corporation double tax problem. Unless you can elect to be taxed as a S-corp, but I'm not sure on that.

Why even register as an LLC if you want to be taxed as a corporation? That's the main reason they were created was to give the liability protection of a corporation, but retain the tax benefits of a partnership.

Re: Scared of Taxes

Posted: Mon Sep 08, 2008 6:25 am
by josh
Go online and file your annual return, its $100 a year and if you fail to renew its a $400 fine
in florida its http://www.sunbiz.org